Demand Curve

What is the Demand Curve

The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. In a typical representation, the price will appear on the left vertical axis, the quantity demanded on the horizontal axis.

BREAKING DOWN Demand Curve

The demand curve will move downward from the left to the right, which expresses the law of demand — as the price of a given commodity increases, the quantity demanded decreases, all else being equal.

Visualizing the Demand Curve

Note that this formulation implies that price is the independent variable, and quantity the dependent variable. In most disciplines, the independent variable appears on the horizontal or x-axis, but economics is an exception to this rule.

For example, if the price of corn rises, consumers will have an incentive to buy less corn and substitute it for other foods, so the total quantity of corn consumers demand will fall.

The degree to which rising price translates into falling demand is called demand elasticity or price elasticity of demand. If a 50 percent rise in corn prices causes the quantity of corn demanded to fall by 50 percent, the demand elasticity of corn is 1. If a 50 percent rise in corn prices only decreases the quantity demanded by 10 percent, the demand elasticity is 0.2. The demand curve is shallower (closer to horizontal) for products with more elastic demand, and steeper (closer to vertical) for products with less elastic demand.

If a factor besides price or quantity changes, a new demand curve needs to be drawn. For example, say that the population of an area explodes, increasing the number of mouths to feed. In this scenario, more corn will be demanded even if the price remains the same, meaning that the curve itself shifts to the right (D2) in the graph below. In other words, demand will increase.

Other factors can shift the demand curve as well, such as a change in consumers' preferences. If cultural shifts cause the market to shun corn in favor of quinoa, the demand curve will shift to the left (D3). If consumers' income drops, decreasing their ability to buy corn, demand will shift left (D3). If the price of a substitute – from the consumer's perspective – increases, consumers will buy corn instead, and demand will shift right (D2). If the price of a complement, such as charcoal to grill corn, increases, demand will shift left (D3). If the future price of corn is higher than the current price, the demand will temporarily shift to the right (D2), since consumers have an incentive to buy now before the price rises.

The terminology surrounding demand can be confusing. "Quantity" or "quantity demanded" refers to the amount of the good or service, such as ears of corn, bushels of tomatoes, available hotel rooms or hours of labor. In everyday usage, this might be called the "demand," but in economic theory, "demand" refers to the curve shown above, denoting the relationship between quantity demanded and price per unit.

Exceptions to the Demand Curve

There are some exceptions to rules that apply to the relationship that exists between prices of goods and demand. One of these exceptions is a Giffen good. This is one that is considered a staple food, like bread or rice, for which there is no viable substitute. In short, the demand will increase for a Giffen good when the price increases, and it will fall when the prices drops. The demand for these goods are on an upward-slope, which goes against the laws of demand. Therefore, the typical response (rising prices triggering a substitution effect) won’t exist for Giffen goods, and the price rise will continue to push demand.

A good for which demand increases as the price increases, and falls when the price decreases. A Giffen good has an upward-sloping demand curve, which is contrary to the fundamental law of demand which states that demand for a product falls as the price increases, resulting in a downward slope for the demand curve.